Adam Smith's Lost Legacy

GavinK9 AT gmail DOT com

Monday, February 28, 2011

What Does the Modern Invisible Hand Add to Visible Prices in Markets?

Lisa Szefel writes (28 February) a review, in Cutting Edge (HERE), “The Age of Fracture: An Intellectual of America and the Twentieth Century”, of The Age of Fracture by Daniel T. Rodgers. Harvard, 2011:

“Rodgers argues that in the 1940s and 1950s, social scientists and political philosophers established the terms of the debate on a range of issues concerning the self and society, obligations and justice, morality and destiny. To these postwar intellectuals, ideas had severe consequences, contexts and nature constricted human action, and history loomed very large indeed. While the turmoil and chaos of the 1960s caused tremors, it was not until the quakes of oil embargoes, unemployment, and inflation in the 1970s, that fault lines in this ideological consensus emerged. Into this breach, a lexicon of microeconomic principles, which had been forming for decades in libertarian circles that stressed agency, contingency, and reason emerged, promising solutions to seemingly intractable problems of disco-era stagflation. Instead of focusing on property and production, workers and owners, these economists celebrated instead the slight of (an invisible) hand that produced wealth and fostered the virtues of competition.”

CommentAt least Daniel T. Rogers does not ascribe the “invisible hand” doctrine invented by post-war Modern economists to Adam Smith.

But that does not save that doctrine, while welcomed by Lost Legacy, from critical scrutiny. It moves the criticism to another level, including asking of what does the so-called invisible hand contribute to the known workings of the market.

Among these long known working is the irreducible fact that market transactions are signaled and negotiated by very visible prices. Indeed, markets cannot work without that visibility.

So what then does an imagined invisible hand bring to the known workings of markets?

The silence and obfuscation from proponents of the modern invisible hand doctrine in not answering the question is itself a condemnation of the doctrine, which ought to be embarrassing to its proponents, many of whom are in the highest ranks of the discipline.

Saturday, February 26, 2011

What Is Wrong With Mercantile Political Economy?

“The great Adam Smith, founder of modern economics, published his epoch-making free-trade tract The Wealth of Nations, the origin of endless subsequent delusions, in 1776. But he was a hypocrite, for Britain in 1776 was not a blank slate upon which free markets and free trade could work their magic. It was instead the beneficiary of several prior centuries of protectionism and industrial policy. In the words of British economist William Cunningham:

‘For a period of two hundred years [c. 1600-1800], the English nation knew very clearly what it wanted. Under all changes of dynasty and circumstances the object of building up national power was kept in view; and economics, though not yet admitted to the circle of the sciences, proved an excellent servant, and gave admirable suggestions as to the manner in which this aim might be accomplished’.

England in this era was, in fact, a classic authoritarian (this is long before English democracy) developmentalist state: a Renaissance South Korea, with kings rather than the military dictators who ruled South Korea for most of the Cold War period. English industrialization must actually be traced 300 years prior to Adam Smith, to events like Henry VII's imposition of a tariff on woolen goods in 1489. King Henry's aim was to wrest the wool weaving trade, then the most technologically advanced major industry in Europe, away from Flanders (the Dutch half of present-day Belgium), where it had been thriving upon exports of English wool. Flemish producers were entrenched behind huge capital investments, which gave them economies of scale sufficient to outcompete fledgling entrants into the industry. So only government action could get England a toehold.Even in the 15th century, there was an awareness that being an exporter of agricultural raw materials was a dead end--a problem impoverished African and Latin American nations wrestle with to this day. And there was an awareness that free trade will not lift a nation out of this predicament: you need some well-chosen protectionism. Henry VII created, in fact, the first national industrial policy of the modern era, long before the Industrial Revolution introduced artificial energy sources like steam power.

“In Praise of Mercantilism, or Why Economic History Isn't Boring”

Does economic history hold a giant clue for getting America out of its present trade mess? Yes, because it debunks the idea that free trade is how nations become prosperous. Instead, it shows that nations win at international trade by playing a 400-year-old game called mercantilism.

… Mercantilists saw free markets as a useful tool in economics, but not the sum total of economic wisdom. Even their much-mocked obsession with the accumulation of bullion was not as irrational as it is usually depicted as being, given that under a monetary system based on gold, accumulating it is the only way to expand the money supply and drive down interest rates, a boon to investment then as now. Mercantilism, in fact, created the modern European economy and thus made possible the colonial power that economically shaped much of the rest of the world. It is thus the foundation of modern capitalism itself.Anyhow: Britain functioned on a mercantilist basis for centuries before its much misunderstood experiment with free trade began. Even as late as the beginning of the 19th century, Britain's average tariff on manufactured goods was roughly 50 percent--the highest of any major nation in Europe. And even after Britain embraced free trade in most goods, it continued to tightly regulate trade in strategic capital goods, such as the machinery for the mass production of textiles, in order to forestall its rivals. This was rational, as the win-win logic of free trade starts to break down if productive capital is mobile between nations or if free trade induces productivity growth abroad.

After Britain embraced free trade in the mid-19th century, its long economic decline, of course, began. Today, the United States is making the same mistake, having mistaken the temporary tactical advantages of free trade for a nation at the peak of its economic power for a fundamental strategic truth. Meanwhile, our rivals, especially but not only in the Far East, hold firm to the mercantilist principles that we ourselves employed for 150 years.

Mercantilism has somewhat different application in developed, rather than developing, nations, but its fundamentals still hold good. At the very least, we need to defend ourselves against mercantilist aggression against us, something we are not doing.

Comment“Mercantile political economy” is how the concept was known from before Smith’s time, but which became ‘Mercantilism’ after Eli F. Heckscher’s magisterial 2-volume Work, published in Swedish (1931) was translated into English from the German edition in 1935, when the German ‘Mercantilismus’ became ‘Mercantilism’ and was adopted by the discipline (personally I prefer and usually use Smith’s name for the phenomenon – and have done since I was an undergraduate).

My problem with Ian Fletcher’s tendentious argument for mercantilism is that is that he takes a very narrow view of what was involved in the history of mercantile political economy in Europe, which survives today in practically every industrialising country (did it ever really go away in the so-called ‘laissez-faire’ decades in 19th-century Britain?).

Mercantile political economy is associated with the centralizing states in European history and the ambitions of kings and princes when faced with dynastic challenges and jealous rivals. Trade was seen as an adjunct of war, and vice versa. Kings saw mercantile development as an instrument of state power and, of course, this growing power had a heavy price in the casualties of wars between and among neighbours, and in more distant regions of the world coming with increasing sailing distances achieved by shipping expeditions that proved anything but benign in the centuries that followed.

Ian Fletcher ignores all of these consequences, as if what happened as northern parts of Europe followed Venice and similar commercial centres in the Eastern Mediterranean in earlier centuries (think of the appalling cost in life – and treasure - in the infamous Crusades) was a mere detail in European history.

In the 17th-18th century, as commercial society gathered some momentum on the way towards, as it turned out, slow growth in the annual output of the “necessaries, conveniences, and amusements of life”, soon to be given a historic boost under industrialization, invention of new techniques and across-industry innovation.

Such was the momentum of mercantile political economy and state glory in the last quarter of the 18th century that when an opportunity presented itself to British legislators and those who influenced them with the forced withdrawal from the former British colonies after the war from 1776, and as advised by Adam Smith in the very last paragraph of Wealth Of Nations (about Britain adapting its mercantile colony ambitions to the ‘mediocrity of its circumstances’), Britain, instead, carried on as normal (learning nothing and forgetting everything) aggressively reinforcing what it held in Eastern Canada, the Caribbean, South Africa, and India , and founding a new ’empire’ in what became Australia, western Canada, Asia and the Pacific. From this consequence came continual wars in Europe, intensified rivalries and more wars among potential trading partners, new shameful aggressions in Asia (for which China still bears old grudges) and gross wastage of human life, ‘treasure, stalled modernization (increasingly captured by new trading powers on the Continent), and dangerous militarisations in Europe that culminated in two ‘world’ wars and several million deaths, and the introduction and spread of a new world force, communism, which killed many millions more.All this from the consequences of mercantile political economy that Ian Fletcher is unrestrained in his praise of, and, apparently, oblivious of these consequential costs, once again, he probably dismisses them as mere details.

I recommend that he reads Heckscher’s ‘Mercantilism’, Adam Smith’s critique of mercantile political economy (Book IV, Wealth Of Nations) and any number of history books of the post-Medieval World.

Mercantile states left Britain by the 18th century stuck with the false ideas legislated by ambitious Kings, Queens, Courtiers, merchants and legislators, such as the Apprentices Statutes (to promote quality tradesmen and their products, which created legalized monopolies that raised prices and restricted competition); Trade Guilds (aimed at quality assurance and protected incomes that raised prices, restricted competition and innovation); Settlement Acts (to cope with local poor burdens and vagabonds that prevented movement of unemployed labour and localized poverty); and the Navigation Acts that aimed to promote a larger domestic marine trade necessary for defence of an island (raised prices, diverted capital into foreign trade and restricted competition, and promoted wars).

In addition, the laws of primogeniture (necessary for stable inheritance in a monarchy) and entails (to preserve large land ownership among descendants), the effect was to freeze land re-distribution by curtailing breakup sales to new owners, and lowered quality and prevented needed improvements (several British colonies abandoned entail laws and notably prospered).

What Ian Fletcher calls the “developmentalist state” actually acted as a drag-anchor on development and a distorting force in the allocation of capital. Fortunately, as Smith noted in his criticism of some Physiocrats who demanded the institution of Natural Liberty before opulence could be created. Smith remarks that if such a precondition was required then no country would have ever produced any opulence; but many did, if only for a while). Nor did he insist that free trade be instituted – or, indeed would ever be adopted in Britain and called such an idea as ‘utopian’.

Smith was never an ideologue. He had a pragmatic view of what was practical and no illusions about the powerful forces that flourished in the mercantile state, and had done for centuries (and which continued for two more, and counting). He observed and reported; he did not propose grand plans for change. That his observations were not acted upon was not due to his ‘hypocrisy’, as Ian Fletcher suggests; there was no ‘clever plan’ to dupe the world. That is fantasy land, populated by the paranoid and immature conspiracy addicts.

But what is worrying is that Ian Fletcher’s understanding of what is happening in the rise of new developed countries is that they are a ‘threat’ to the USA and 'something must be done about it'. But the mercantile state, bolstered by modern state capitalism, is in no real position to face such challenges using the old mercantile methods and forgetting the lessons of mercantile history. Mercantile political economy is a dead-end. Adam Smith taught that within the confines of the necessary discretion needed to avoid the full weight of the protectionist establishment, then, as now, rampant within the mercantile state. The best that may be hoped for is that measures are taken over time to mitigate the worst effect of mercantile political economy on a case by case basis.

Thursday, February 24, 2011

More on Steam-Driven Pin Making in the 1770s

I have received further details from Michael Perelman of the "integrated pin factory" described by Arthur Young in 1772 (3rd edition, first published in 1770). The following article sets our Michael's case (as well as much, much more - much of it highly controversial as its from a modern Marxist world view).

“AbstractEconomists of virtually all schools of thought regard Adam Smith sympathetically. This article explores Adam Smith’s authoritarian side, showing the close connection between Smith’s notion of appropriate behavior and the prevailing economic organization. This article explores how this dimension of Smith’s pre-analytic vision shaped his writings.”

In Michael's letter to me, he adds:

“The pin factory is described by Arthur Young, who recommends visiting it. It used steam when the water flow was low, to raise the water to run the mill.” (MP) His article reports:

“The ﬁrst integrated pin factory was the Dockwra copper works, founded in 1692. It produced about 80 tons of copperper year, perhaps as much as half of the entire industry. The company had no less than 24 benches for drawing wire (formaking pins). Dockwra seemed from the start to have given attention to the possibility of new methods (Hamilton, 1967,p. 103).

Eventually, Warmley works founded near Bristol in 1746 had surpassed Dockwra. The Warmley works came to popularattention in 1770, when Arthur Young published A Six Months Tour Through the Southern Counties of England and Wales.Young was a proliﬁc observer of agriculture, as well as economic life in general. Young was far from obscure. His bookswere widely translated in European languages. This particular book was already in its third edition by 1772. A carefulstudy of authorities used in parliamentary debates found that the MPs cited Young far more than Adam Smith (Willis,1979).

Young described the process of integrated pin production at Warmley, beginning with how the molten metal was:

poured into a ﬂat mould of stone, to make it into thin plates, about 4 feet long and three broad. The plates are thencut into 17 strips and then again, by particular machines, into many more very thin ones, and drawn out to the lengthof 17 feet, which are again drawn into wire, and done up in bunches of 40 s value each; about 100 of which are madehere every week, and each makes hundred thousand pins. The wires are cut into them, and completed here employinga great number of girls who with little machines, worked by their feet, point and head them with great expedition;and each will do a pound and a half in a day.

The heads are spun by women with a wheel, much like a common spinning wheel, and then separated from oneanother by a man, with another little machine like a pair of shears. They have several lapis calaminaris stones forpreparing it to make the brass, of which they form a vast number of awkward looking pans and dishes for the Negroes,on the coast of Guinea. All the machines and wheels are set in motion by water, for racing, which there is a prodigiousﬁre engine, which raises, as it is said 3000 hogsheads every minute. [Young, 1772, pp. 170–74]"

{This system replaced the people who had turned wheels in the operation. The displaced workers represented one-sixthof the labor force (Allen, 2009, p. 147).}” (MP)

CommentI shall check Young’s reference to the making of pins from wire pulled to ’17 feet’. This reads like a simple ‘extrusion of molten metal’ (still used when I was an apprentice in a Austral Bronze , Sydney) the 1950s. In my book, Adam Smith: a moral philosopher and his political economy, Palgrave, 2008 (2nd edition, 2010), I followed J-L. Peaucelle, 2006. 'Adam Smith's use of multiple references for his pin-making examples', European Journal of the History of Economic Thought 13:4: 480-512, cited in Michael's references, and also volume of Diderot’s Encyclopedia (whose illustration showed coiled wire on a great wheel being cut up manually for the pins). Smith didn’t mention how the wire was prepared, whether by stretching or heat.

Anyway, Michael's interesting point is worth pursuing. Any readers with further information are invited to lass them to Lost Legacy.

Tuesday, February 22, 2011

Did Adam Smith Ignore a Steam-Driven Pin Factory?

Michael Perelman, a thoughtful modern Marxist and author of a host of books on economics from a left perspective at California State University announced on a History of Economics Blog to which I subscribe that he has just published a new book, "The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers."

He says that the central theme of his book (“not suggested by the title”) is that economists frame their discipline by emphasizing transactions to the exclusion of considerations of production.

“Beginning with Adam Smith's pin factory, economists have tried to turn attention from production. I don't have time to explain it here, but his very clever presentation was dishonest, ignoring large industry, including a steam run pin factory.

“Those economists, beginning with Jevons, who have trespassed into the subject of production [something more than the purchase of the appropriate factors with the assumption that everything in the blackbox will be performed efficiently] have been severely reprimanded.”

CommentI first met Michael Perelman at a Summer School at George Mason University, Fairfax where he contributed a paper, which referred to Adam Smith.

Afterwards, we had a conversation where I offered my interpretation of some of the summaries he had made. Later, he kindly sent to me a draft copy of a paper he was writing that quoted Adam Smith fairly extensively. I sent to him my detailed comments, mainly technical, and saw him again at a History of Economics Conference in Toronto.

Perelman is an Marxist intellectual who converses without rancour, despite our differences on Adam Smith (we have not discussed Marx in any detail) and it was pleasurable to exchange views with him. I have ordered his latest book – he has written several (see Amazon).

I am not clear at the moment what he means by saying “economists have tried to turn attention from production”, though I am wary of ascribing to economists as a group some kind of collective intention (the discipline is far more open than Perelman implies) and also would ask ‘why’ they would do this. The discipline is also more argumentative than this image allows – differences on major issues, as well as minor nuances, would promote journal articles of disagreement without much prompting (Young Turks and Old Hands are too vigilant for such a consensus to emerge without a citation trail).

That is why I am intrigued by the reference to Adam Smith and his “trifling” example (Smith’s words) that Perelman describes as “his very clever presentation was dishonest, ignoring large industry, including a steam run pin factory”. There was not much “large industry” about in the 1760s-1770 (when Smith used the pin factory example of labour productivity – see his Lectures on Jurisprudence (1763) and Wealth Of Nations (1776). Smith was familiar with Dr Roebuck's Carron Foundry - he took Edmund Burke to see it.

That there was a “steam-run pin factory” would really be remarkable, given steam engines were largely the “Newcomens” crude engines in the coal pits. James Watt’s improvements were dated from the 1760s, like the inefficient Newcomens also for pumping water in pits. It would be more remarkable too, if Smith knew of a steam-driven pin factory and took no notice of it (was such steam-driven power source known to Diderot in his Encyclopedia?). Hence, I await the arrival of Michael Perelman’s new book in anticipation for the details.

As for Jevons (writing from the 1870s), long after Smith had gone, I have no comments to make. Does this mean that the ‘conspiracy’ to downplay production lasted at least a hundred years? Who was directing it?

Having said all this, I am sure that Michael will respond in his scholarly manner, and unlike many others, not resort to political posturing or preaching, which I think is in the best traditions of the Republic of Letters and why I have a lot of time for him.

Monday, February 21, 2011

Most Ridiculous Statement of 2011 (so far)?

Mike Stones, 21 February, writes this piece (the name of the publication is not clear) (HERE):

“Arab Revolt underlines the need for action to remedy high food prices”

Those food shortages, aggravated by the drive towards energy crops and increasing urbanization, will drive the price of food inexorably upward.

That means we can no longer trust Adam Smith’s “the invisible hand” of free market forces to regulate food markets. In the 21st century, the consequences of failure are simply too great to tolerate.”

CommentPerhaps a prize could be won by Mike Stones for the most ridiculous statement (so far) of 2011.

Apart from the usual nonsense about ‘Adam Smith’s “the invisible hand” of free market forces’ (well documented regularly on Lost Legacy) as a myth in relation to Adam Smith, (who said no such thing), for Mike Stones, the author of the article, to assert that world agriculture is akin to “free markets” when it is probably the most regulated, distorted and government controlled “market” should it ever warrant such a term as a "market", let alone the adjective “free” in the same sentence, is plainly ridiculous.

Moreover, the implication that even more regulations in the world of agriculture are needed is beyond absurd – it’s lunacy.

Saturday, February 19, 2011

A Linguist Misses Adam Smith's Point About Man Being A Social Being

George Lakoff, author of The Political Mind, Moral Politics, Don't Think of an Elephant!, Whose Freedom?, and Thinking Points. He is Richard and Rhoda Goldman Distinguished Professor of Cognitive Science and Linguistics at the University of California at Berkeley.

“The market itself is seen in this way. The slogan, "Let the market decide" assumes the market itself is The Decider. The market is seen as both natural (since it is assumed that people naturally seek their self-interest) and moral (if everyone seeks their own profit, the profit of all will be maximized by the invisible hand).”

CommentI am sometimes asked by sceptics of Lost Legacy’s campaign against the modern interpretation/invention of the “invisible hand” – “why is the invisible hand so important? It’s merely an argument over a trivial detail that does not mean all that much”, they tell me. (Let’s face it, it is also a great, though boring, “put down” delivered as only a certain type of scholar can do.)

Well, here is an example of why it is important to me and why is should be important to them. Professor George Lakoff doesn’t believe in the “invisible hand” myth – that’s clear from the context – but he is able to assert that “conservatives” do believe in it, and with some justification – read any modern textbook, or journal article that mentions the ubiquitous “invisible hand” (with the exception of my own – and a very few others).

Professor Lakoff uses this near unanimity among modern economists (conservative, libertarian, Austrian, Hayekian, Public Choice, neo-classical and some heterodox economists (and others apparently, including Chinese communists) to build his case against ‘capitalism’ and its alleged assorted ‘crimes’ against morality, decency, and humanity (follow the link for his full, albeit largely linguistic, thesis).

The invisible hand myth damages economics because it is without merit and it is refutable by the evidence of Smith’s own Works and by the non-evidence of its presence in the real world. Markets, through very visible prices and the reactions of human behaviours to what is visible, fully explains their social power. Economic theorists since the 1870s developed mathematical relationships which do not conform to how humans tend to behave – as the behaviourists have demonstrated - which is more than the mathematicians, marginal utility equilibrium theorists, and the purveyors of Homo Economicus have ever done.

Professor Lakoff misses Adam Smith’s main point, namely that society is not just about individuals – it is always in a social context. Self-interest can only operate between individuals in society. The earliest and decisive propensity common to humans was that of ‘truck, barter, and exchange’, which by definition requires more than one individual.

Society provides the "mirror" (said Smith) from which individuals learn how to behave appropriately to that society (different societies may have different ideas and practices as to what is appropriate). The lonely, self sufficient ego is a figment of the American (and Ayn Rand’s) imagination, not from Adam Smith.

However, this is not the time to provide a compete rebuttal of Professor Lakoff’s wilder shores of his imagination about Adam Smith, his Works and his moral philosophy, or his political economy.

Adam Smith no ideologue

“Adam Smith, for all the considerable flaws in his thinking, wasn’t stupid. He understood the class conflict inherent to the economic system he was describing.

What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

He also understood that this wasn’t an even match-up. Under 18th Century capitalism, not only were most workers living hand to mouth, organizing was expressly forbidden by law. It’s pretty clear that Smith thought this was an unfair state of affairs.It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

Of course, workers organized and fought anyway, were beaten, killed, thrown in prison, and vilified in the capitalist press. But their “masters,” the owners of the factories, organized themselves as well. These organizations operated with the consent of the law to do what it is masters always do, the very aspect that unites them as a class: lower the wages of the workers. But this operated out of sight.”

CommentFollow the link and read the rest of Gavin Mueller’s case. Gavin’s approach is from a left perspective (makes a change from the usual right wing extremist approach that invents myths about Smith being a believer in laissez-faire, pure free market economics, and mystical ‘invisible hands (of god, etc.,).

However, Adam Smith is much more nuanced a thinker than Gavin Mueller appreciates from the Left and some anarcho-Libertarians believe from the Right.

Adam Smith, as a philosopher wrote that he “observed, but did nothing”, somewhat at odds with Marx and Engels who believed the purpose of philosophy was ‘to change the world’. In Smith’s case he spoke out as Gavin Mueller correctly observes (and quotes from Wealth Of Nations), but he also spoke out in favour of the ‘distinction of ranks’ in society – Smith above all else considered social stability an important element for the growing opulence of the majority of the populations, who ‘feed’ and ‘clothe’ all and he was more than suspicious of the ‘Man of System’ who believes he can, through his schemes, move people like wooden pieces on a chess board, when in fact people have minds of their own and move under their own volition.

I should also point out, respectfully of course, that ‘capitalism’ was a long way from 18th-century ‘commerce’ – the word was not invented in English until Thackeray’s novel, The Newcomes (1854).

The Guilds and Incorporated Towns long preceded Adam Smith’s critique of their monopolizing behaviours, and essentially were legal bodies of artisans and ‘skilled’ tradesmen that restricted new entrants to their trades, fixed (high) prices and exploited consumers (sound familiar to trade unionists and professional bodies?).

The Combination Acts were part of a raft of restrictive laws, aimed at distorting the economy on behalf of mercantile interests. Tariffs and prohibitions were part of them too (supported as much by the workers as by the merchants and manufacturers – and farmer interests). Not surprisingly, modern trade unions also support trade restrictions – even prohibitions too. The ‘brotherhood of man’ extends up to the nations frontier, but no further.

Mercantile political economy lives on. Men and women of ‘system’ still rule the world. Gavin Mueller should contemplate what Adam Smith might have said about that (despite the massive opulence enjoyed by the majority of workers in North America and Western Europe – and soon in China, India, and Brazil, but not, alas, in Venezuela, Cuba, and North Korea.

Friday, February 18, 2011

A Methodologist Uses an Error Prone Method

“Invisible-hand explanations suggest themselves naturally to an economist they are deeply rooted in the disciplinary ethos. …”

“Scientific rules, and the means for their enforcement, constitute the invisible-hand mechanism, by which I mean: scientific rules induce (partly) interested scientific actors with worldly goals to make choices that (sometimes) lead to epistemically good scientific outcomes.”

“… attempt to use in science studies the name `invisible hand’, which is often a term of derision outside of economics, must distinguish Adam Smith’s sense of the term - unintended if planned-looking beneficial consequences from cognate meanings, such as laissez-faire and Pareto optimality. (pp141-43) …”

CommentIn my more heady-days as a youngish lecturer in economics I, and several colleagues, became interested in economic methodology and we read a range of books from Lactos, Popper, Kuhn, et al.

We were brought down to earth when one of the young Turks had a paper on method in economics (Positive and Normative statements) rejected by a journal of philosophy, with the editor’s put-down comment that the issues he had raised relating to economics had been settled in philosophy for some time.

Since those days I have maintained a distant interest in method in philosophy and economics, hence I read with interest Thomas (TIM) C. Leonard’s, “Reflection on rules in science: an invisible-hand perspective” (HERE) https://www.princeton.edu/~tleonard/papers/Rules_in_science.pdf

Tim’s statements above caught my attention, so I read on to the section headed: “SCIENCE AS AN INVISIBLE-HAND PROCESS”.

This seemed familiar after reading some time ago Emrah Aydinonat’s, The Invisible Hand in Economics: how economists explain unintended social consequences, Routledge, London, 2008, an interesting book, not without merit, which nevertheless I found flawed in its basic proposition that Adam Smith was connected to modern versions of ‘spontaneous orders”, and Samulesque invisible hands of perfect competition, Pareto’s welfare propositions, and General Equilibrium.

Thomas (TIM) C. Leonard’s, “Reflection on rules in science: an invisible-hand perspective” suffers from the same flaw. Example:‘Adam Smith uses the term `invisible hand’ only twice in work published during his lifetime, most famously (and closest to the sense just defined) in the Wealth of Nations.

[E]very individual . . . neither intends to promote the public interest, nor knows how much he is promoting it . . . . [H]e intends only his own gain and [it – sic], and he is, in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. (1937 [1776]: 423)

CommentTim leaves out crucial parts of the paragraph that he quotes (as do most others). The crucial missing words are restored here [in square brackets]:

“[As] every individual … [therefore, endeavours as much as he can to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He …[generally, indeed,] … neither intends to promote the public interest, nor knows how much he is promoting it … [By preferring the support of domestic to foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value] … he intends only his own gain and it, and he is, in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.” (Cannan, ed. 1937, p. 423; or Campbell and Skinner, eds. 1976, Oxford University Press, p 456).

The significance of the missing words – and the missing previous 8 paragraphs – is that Tim’s quote removes all reference to the actual case discussed by Adam Smith, namely that of the behaviour of some, but not all, merchants, whose concerns for the security of their capital in foreign trade, lead them to invest in “domestick” industry, the unintended consequence of which is that “domestic” annual revenue and employment is higher that it would have been if they had sent their capital abroad, as Smith explains in the missing eight paragraphs.

This is what Adam Smith’s limited use of the metaphor of “an invisible hand” refers to “in a more striking and interesting manner” (Adam Smith’s Lectures on Rhetoric and Belles Lettres”, [1763], 1983, p 29). Metaphors refer to an object; they are not real in themselves – there is no ‘invisible hand’!

Tim’s slight of hand (repeated ad nausea, since the 1950s by modern economists) is an easily exposed error, particularly for an author writing about scientific methodology! It is equivalent to a scientist doctoring her test results.

Tim, however, comes close to understanding aspects of Adam Smith’s teachings, without realizing the irony of his caveats:

“The problem, I suggest, is more one of misconception. Non-economists find it implausible that, absent the guiding visible hand of authority, self interested action can lead to good social outcomes. Or, more to the point, they tend to conflate invisible-hand explanations with a kind of laissez-faire. The conflation may arise from the term’s close association with Adam Smith, and Smith’s seminal role as the proponent of free trade against the mercantile view, the original debate over the proper scope of the state’s role in the economy (Demsetz 1993: 159, 60). But just as it is false to assume that the choice is dichotomous between central planning and anarchy, it is incorrect to cast the original invisible-hand theorists - David Hume, Adam Smith and others we might group into the Scottish Enlightenment - as proponents of vulgar laissez-faire.”

CommentLaissez faire (words Smith never used) became associated with his distant memory as part of a political campaign for ‘free trade’ by the such as the Manchester School in the 1840s and by propagandists for mill and mine owners opposed to government legislation under the Factory Acts, shorter hours, and women and children in the pits.

Smith’s opposition to the manifest distortions of mercantile political economy did not mean he favoured no government interventions at all, nor was he restricted to the 19th-century view of the ‘night-watchman state’. He did not regard all interventions by legislators as disastrous, though he gave plenty of examples of such disasters.

Tim shows signs of recognizing these misguided interpretations, but sticks to his theme of a wider view of what the invisible-hand allegedly meant to Smith. In both examples he gave in Moral Sentiments (feudal landlords and their serfs) and Wealth Of Nations (mercantile merchants in a most uncompetitive economy) he was not dealing with free-markets. The invisible-hand had nothing to do with ‘perfect competition’, nor Pareto’s welfare criteria or General Equilibrium.

If modern economists want to give new meanings to the metaphor of an invisible hand – or even invent some role for it in a theory of ‘spontaneous order’, they are free to do so. What is in question is whether they can also invent an association with Adam Smith. I humbly argue, on methodological grounds that they should not do so, and moreover cannot do so, without massaging Smith’s actual words and meaning.

Thursday, February 17, 2011

Charles Darwin As the Founder of Modern Economics?

Stephen J. Dubner, author and journalist who iniytes readers to Follow @freakonomics on Twitter, writes (17 February) in The New York Times Opinion pages (HERE)

“Darwin as Economist?”

“One session at the recent AEA meetings was addressed by “popular economics,” with a panel including Robert Frank. who is writing a book arguing that Charles Darwin, more so than Adam Smith, is the true forefather of modern economics. This made me think back to a chunk from the introduction of SuperFreakonomics that we ended up tossing during the editing process … but I thought it might be worth posting here nonetheless as a prelude to Frank’s book. So here’s our SuperFreakonomics outtake on Darwin-as-economist.

On May 24, 1859, Thomas Bell addressed the Linnean Society, which was among the world’s leading institutions for the study of natural history. Bell lamented that the previous year was not a noteworthy one; it had not, he said:“been marked by any of the striking discoveries which at once revolutionize, so to speak, the department of science on which they bear” …

… even a scholar as learned as Thomas Bell failed to appreciate just how profound and revolutionary it was.These days, Darwin is regularly proclaimed a genius, and understandably so, for he essentially solved a riddle – where do species, including man, come from? – that had puzzled great thinkers for centuries. .. So Darwin’s long-brewing discovery was hurriedly announced at a Linnean Society meeting (along with Wallace’s findings [in 1859], after which he rushed to explain his entire theory in a book called The Origin of Species. And the world was never the same.… Darwin was the man who painstakingly marshalled the empirical evidence that proved the theory. It was evident that he was not merely a man preaching what he hoped to be true; rather, he was a scientist explaining what the data said.

… Darwin identified the mechanism by which evolution occurred: natural selection. In his decades-long course of collecting data, Darwin came to understand that species changed in large part because they were forced to compete for resources with other species and other animals within their species. As habitats changed, so too did the allocation of resources – which allowed some species to survive, thrive, and evolve while others died out.

In this regard, “natural selection” is a great deal like “the economic approach.” If the latter describes how people get what they need when other people need the same thing, then the former describes how, say, a groundfinch gets when it needs when other groundfinches need the same thing. Therefore, the question of whether a particular species of groundfinch survives is in fact a lot like asking how and why a particular young woman becomes a prostitute instead of president.”

CommentFollow the link and read Dubner’s full argument. Frankly, I do not find it convincing. While Darwin did not know of Smith’s work on the History of Jurisprudence, which Smith had burned in 1790, but students’ notes of these lectures were found in 1895 (published by Canaan in 1896, and by Oxford in 1978), it is remotely possible that Darwin saw other student‘s notes while in Edinburgh as a student.

However, such speculation is unproductive as evidence. What is productive is to read how Smith articulated the evolution of the Ages of Man, from Hunting through shepherding and farming to the 4th Age of commerce (which actually began millennia ago, with the appearance of relatively stable settlements - the remains of which are continually excavated from about 8,000 years ago in the area where we know agriculture first appeared).

Note the significance of this parenthesis: most people see Adam Smith as the ‘beginning’ of what they call ‘capitalism’, which is not the case. His evolutionary theory was paced at longer time-scale than is appreciated, but that it was an evolutionary theory, like nature selection – no pre-determined outcome or result in mind (hence the multiple variations, some that work out and some that do not - they either wither on their own failings or are pushed aside by nature’s events or other external human interventions. That is why development through the Ages is discontinuous, societies rise and fall, the centre of change shifts geographically and stagnates elsewhere.

Much of this comes through in Wealth Of Nations, Moral Sentiments, and the History of Astronomy, all available to Darwin.

Therefore, I must conclude that Stephen J. Dubner, and Robert Frank’s hypothesis that “Charles Darwin more so than Adam Smith, is the true forefather of modern economics” is unproven and I doubt on this evidence that it will be sustained, though, of course, I shall defer my final judgement until I read Frank’s forthcoming book.

[One further note is that Charles Darwin considered himself as a geologist – an evolutionary subject if ever there was one. Adam Smith, of course, was a colleague and close friend of James Hutton, the geologist who first realized just how old the world was in 1787. His works were available to Darwin too. (and of course, Adam Smith].

Spare 30 mins for a Top Class Professor's Lecture

Thanks to Peter Boettke at the The Coordination Problem Blog (HERE) we can enjoy – and learn from – a videoed talk by Professor Deirdre McCloskey delivered on 9 February 2011 at the Mercatus Centre, George Mason University, Fairfax Virginia:

It is one of those really stunning performances that students gain access to at top US Universities.

I recommend it, speaking as a student of Adam Smith’s lectures that covered similar ground in an historical sense.

McCloskey, with the benefit of more recent work on the evolution from Hunter-gathering (Smith’s 1st Age of Man) to commercial societies (Smith’s 4th Age of Man), post-1800, presents an original thesis on what caused the sudden shift upwards in living standards from its long historical low of $3 a day to hundreds of dollars a day, once North Western Europe industrialised.

She sees innovation as the driving force of the modern world and how the unprecedented conditions for the widespread waves of innovation that that followed led to the growth seen now as a worldwide phenomenon.

Wednesday, February 16, 2011

Political Scientist Gets Adam Smith Wrong

Louis René Beres (professor of Political Science at Purdue University in West Lafayette, IN) writes in the OUP Blog (HERE):

"Economic Volatility, Hyper Consumption, and the “Wealth of Nations”

Adam Smith published his Inquiry into the Nature and Causes of the Wealth of Nations in 1776. A revolutionary book, Wealth did not aim to support the interests of any one particular class, but rather the overall well-being of an entire nation. He sought, as every American high-school student learns, “an invisible hand,” whereby “the private interests and passions of men” will lead to “that which is most agreeable to the interest of a whole society.”

Still, this system of “perfect liberty,” as he called it, could never be based upon encouragements of needless consumption. Instead, argued Smith, the laws of the market, driven by competition and a consequent “self-regulation,” actually demanded explicit disdain for any gratuitous or vanity-driven consumption.

What does this all mean for better understanding current economic dislocations and volatility? Above all, it suggests that modern commentators and pundits often speak in blithe disregard for Smith’s true beliefs, ignoring that his primary concern for consumption was always tempered and bounded by a genuine hatred for “conspicuous consumption” (a phrase to be used more pointedly by Thorsten Veblen in a later century).

For Adam Smith, it was only proper that the market regulate both the price and quantity of goods according to the final arbiter of public demand, yet, he continued, this market ought never to be manipulated by any avaricious interferers. In fact, Smith plainly excoriated all those who would artificially create or encourage any such contrived demand as mischievously vain meddlers of “mean rapacity.”

CommentWhat “every American high-school student learns”, including apparently Professor Louis René Beres, about “an invisible hand” is, in fact, mostly nothing to do with Adam Smith, but was invented in modern times by professor of economics at the University of Cambridge (England) and the University of Chicago and published throughout the profession by authors like Paul Samuelson (Economics, 1948, McGraw Hill, 19 editions to 2010), and the many derivatives ‘look alike’ textbooks that appeared from the 1950s onwards.

Once the professors working at the frontiers, opened by Professor Pigou, in Cambridge, in his Welfare Economics (1922) and Arrow and Debrue in General Equilibrium (1960) latched onto the metaphor of ‘an invisible hand’ (used by Adam Smith in a entirely different and much more simple context), they pushed its new status as a ‘theory’, ‘concept’, and near theological ‘doctrine’. As they say, a new ‘paradigm’ was born, believed today with near-messianic status by true believers everywhere, few of whom have ever tracked the simple uses by Adam Smith in his Theory of Moral Sentiments and his Wealth Of Nations, and wondered why so much fuss has been made of it by exponents of a supposed science

Professor Louis René Beres presents Smith’s metaphor as stating that “the private interests and passions of men” will lead to “that which is most agreeable to the interest of a whole society.” That is far too strong. Other go much further, and assert that even the ‘selfishness’ of individuals can lead to this startling result, other that it works through to bring about the ‘best of all possible’ outcomes when unfettered markets are left unfettered.

In Wealth Of Nations (Book IV, chapter 2, paragraphs 1 to 8), Smith observes that some, but definitely not all, merchants who feel insecure about sending their capital abroad prefer to invest locally at home, and, as a consequence, without intending it, add to ‘domestic revenue and employment’, which means that domestic investment is higher than it would otherwise be if they exported abroad. Not an other than blindingly obvious and safe conclusion: the whole being the sum of its parts.

Now this was nothing to do with ‘perfect competition’ (such ideas were advanced 100 years later), nor did it have anything to do with ‘Natural Liberty’ (a 17th theory, due to Grotius and Pufendorf). In fact, Smith, ever the observer of the real world, wrote about 18th-century mercantile political economy, then operating in Britain, which featured tariff protection and prohibition regimes, interventionist laws, imposed for other reasons, in the form of Incorporated Towns and Guilds, with their legal monopolies of most known trades from the 16th century, the Statute of Apprentices, which limited trades to 2 apprentices per master (7 years), which legally restricted competition, to Settlement Acts, which prevented people from, leaving one parish to join another, and, at sea, the Royal Navy and the Customs Officers prevented foreign ships from carrying British cargoes to and from the North American colonies. Added to which the laws of primogeniture and entails prevented the redistribution of land to new owners, and the Chartered Trading monopolies.

None of these had anything to do with “that which is most agreeable to the interest of a whole society”. So where was this alarming conclusion and absurd assertion made by Adam Smith? It wasn’t.

Monday, February 14, 2011

Adam Smith: "Opulence and freedom, the two greatest blessing men can possess"

Adam Smith taught his students about the institution of slavery both throughout history and in the world of his day in his Lectures On Jurisprudence (1751-64). It makes for grim reading today though slavery still exists (quietly) in some countries still, and the trade in slaves continued long after it was made illegal in Britain in such places as North Africa and the Middle East, India, and China.

Adam Smith:

“Opulence and freedom, the two greatest blessing men can possess, tend greatly to the misery of the this body of men, which in most countries where slavery is allowed makes by far the greatest part. A humane man would wish therefore if slavery has to be generally established that these blessing(s), being incompatible with the happiness of greatest past of mankind, were never to take place” [Wednesday, 16th February, 1763, as reported in LJ(A) iii.112: 185].

What a wonderful way Smith had of summarising his philosophy in the his words: “Opulence and freedom, the two greatest blessing(s) men can possess”!

He continues his frank account of the history and practice of slavery with a reminder to his students, destined as many were to serve in various appointments in the Churches of England, Scotland, and Rome, of the strident escapism into religious fervour in their calling, and the self-righteousness of their zealots:

“But we are not to imagine the temper of the Christian religion is necessarily contrary to slavery. The masters un our colonies are Christians, and yet slavery is allowed amongst them. The Constantinopolitan emperors were very jealous Christians and yet never thought of abolishing slavery. There are many Christian countries where slavery is tolerated at this time” [LJ(A) iii.128: 191).

These put into the perspective the one-sided hyperbole of certain self-styled Christian Bloggers, whom we forgive for they know not what they are talking about when they rant at Adam Smith’s alleged complicity in the maltreatment of indigenous peoples and African slaves transported to the colonies, which are views based on total ignorance of Adam Smith’s philosophy and his Works.

You can read more about the authentic Adam Smith on slavery, and much else, in his Lectures On Jurisprudence, [1762-63], 1978/82, Oxford University Press, and Liberty Fund.

Saturday, February 12, 2011

Once More With Feeling...

“Smith appears to make some questionable assumptions in offering the theory of the invisible hand. The following passage encapsulates the problem:

'Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.' (IV.2.4)

Assuming, however, that individuals are nonetheless predominately motivated by the particular configuration of self-interest that Smith has in mind, it is unclear whether the “society” to which advantage accrues is necessarily the immediate and “entire” society to which the individual belongs. It seems quite plausible that the benefits thus obtained might be concentrated in very few hands within a society. Do these beneficiaries represent the interests of society in general? Smith clearly privileges the total sum of “benefits,” but in this case there seems to be some ambiguity in the meaning of “benefit,” especially when some elements within society may actually experience substantial “losses” in the process.

… If Smith is right that society receives the greatest benefit even when every individual works to advance his own advantage, and if such a theory informs this egocentric modality, it seems that maximizing the public good is precisely the goal—why must it be hidden?”

CommentI made the following comments on the Ultra-Bourgeoisiology” Blog:

“Adam Smith did not have a "theory" of "an invisible hand". That was an idea invented by modern economists from the 1950s. Smith used '"an invisible hand" as a metaphor in Wealth Of Nations (Book IV, chapter 2, p 456) for some, but not all, merchants, who were concerned with the security of trading with foreign countries or the colonies, and, therefore, preferred to trade "domestically".

It was their concern for their own security that 'led them' to invest in "domestick" industry, which Smith correctly noted added to "domestick annual revenue and employment" - a purely limited arithmetic outcome (the whole is the sum of its parts) - which Smith believed was a public benefit. The idea that this was a general benefit across all participants to the same degree was invented by, among others, Paul Samuelson in his Economics text, 1948, p 36, and in theories of General Equilibrium.The author quoted a few lines from paragraph 9 and missed the particular and limited meaning Smith gave to it, as well as ignored the previous 8 paragraphs in which Smith makes clear his meaning. Metaphors express "in a more striking and interesting manner" their "objects" (see Adam Smith's own "Lectures in Rhetoric and Belles Lettres" [1763] 1983, p 29.”

I should have added that market prices are not invisible – it evident that they are very visible – and the metaphor cannot therefore refer to a “theory of markets”. The relative insecurity of market participants is invisible, which, on this occasion, is the object of the metaphor.

Thursday, February 10, 2011

Adam Smith on European (and Christian) Treatment of the Indigenous Peoples of the Americas

My heavy cold is slowly passing. Despite my listlessness and bouts of coughing, (plus the prompt home visit from a unfairly and much-maligned NHS General Practitioner system, resulting in a free prescription for antibiotic capsules, funded by taxation), I occasionally check the Internet for daily Google Alerts on references in the world media to Adam Smith, without the energy to reply or comment on several interesting pieces since last Monday (for which my apologies to regular readers).

Among these, I read what can only be described as an ignorant rant against Adam Smith’s of alleged discrediting, where not actually insulting, the indigenous people of the Americas in Wealth Of Nations. The ranter – some kind of Christian radical – opened with an attack on Smith for comparing the living standards of ‘savages’ with those of the poorest day labourers in Scotland in Chapter 1 of Wealth Of Nations.

I would quote directly from the ranter’s rant, or even give a reference, but I have ‘lost’ it, accidentally I can assure readers, to my regret. [Here it is: http://fathertheo.wordpress.com/2011/02/06/adam-smith-the-savages/]The piece is hardly worth reading but it is Lost Legacy's policy to provide sources, and not just because it is clear that its author has never read Adam Smith’s Wealth Of Nations, nor does he understand the quotations he has read, but its author exposes an alarming ignorance of his subject.

Adam Smith was not mocking the poverty of the ‘savages’; he was contrasting the effects of the relative absence of the division of labour in hunter societies, the First Age of Man, which he makes clear was once the norm in Europe, until the division of labour was underway following the discovery of shepherding (the second Age of Man) and, eventually, farming (the 3rd Age of Man). This had absolutely nothing to do with the alleged ‘genius’ of humans in one Age or geographical location, or the ‘stupidity’ of people in earlier ‘Ages’ or locations. There were no racial imputations whatsoever in Adam Smith’s examples.

Moreover, Smith was never blind to the social injustices suffered by the ‘defenceless’ indigenous peoples in the Americas at the hands of Europeans. He showed an embarrassing honesty about the conduct of Europeans in all the discoveries of recent times - just 300 years, when Smith was writing in mid-18th century. Let me quote from Wealth Of Nations:

“The discovery of America, and that of passage to the East Indies by the Cape of Good Hope, are the two Greatest and most important events recorded in the history of mankind. Their consequences have already been very great: but, in the short period of between two and three centuries which has elapsed since these discoveries were made, it is impossible that the whole extent of their consequences can have been seen. What benefits, or what misfortunes to mankind may hereafter result from those great events no human wisdom can foresee” (WN IV.vii.c.80: 626).

This is a clear example of why Smith was not in the habit of forecasting because ‘no human wisdom can foresee’ the future. Smith, however, was industrious in looking at the past and at what had brought the present about. So he, then turns to examine the early effects of the present in the impact of European and Christian-driven behaviour on those primarily affected – the indigenous peoples – who shared none of the benefits of arrival of Europeans on their shores:

“By uniting, in some measure, the most distant parts of the world, by enabling them to relieve one another's wants, to increase one another's enjoyments, and to encourage one another's industry, their general tendency would seem to be beneficial. To the natives, however, both of the East and West Indies, all the commercial benefits which can have resulted from those events have been sunk and lost it the dreadful misfortunes which they have occasioned. These misfortunes, however, seem to have arisen rather from accident than from any thing in the nature of those events themselves. At the particular time when these discoveries were made, the superiority of force happened to be so great on the side of the Europeans, that they were enabled to commit with impunity every sort of injustice in those remote countries” (WN IV.vii.c.80: 626).

That’s not too good an account of the blessings received from their introduction to Christianised Europeans, and shows no racial bias whatsoever. Would that the Church had spoken up for them as clearly as Smith (whose Wealth Of Nations was read at the highest levels in the British and the emerging Colonial, establishments on both sides of the Atlantic)?

However, he did warn, almost prophetically, of what might happen when the colonial subjects acquired in due course the accoutrements of knowledge – and the weapons – from the division of labour in an later age (that of the Age of Commerce, the 4th Age of Man). This episode is one that we may now be entering with the rise of the commercial power of India, China and Brazil.

“Hereafter, perhaps, the natives of those countries may grow stronger, or those of Europe may grow weaker, and the inhabitants of all the different quarters of the world may arrive at that equality of courage and force which, by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another Nothing seems more likely to establish this equality of force than that mutual communication of knowledge and of all sorts of improvements which an extensive commerce from all countries to all countries naturally, or rather necessarily, carries along with it” (WN IV.vii.c: 626-7).

Smith had no doubts about the motives of Europeans taking the extraordinary risks of trans-Atlantic voyages: it was greed for gold, sanctified by pious allusions to converting the indigenous peoples to Christianity to get their hands on what for them were mere trinkets:

“In consequence of the representations of Columbus, the council of Castile determined to take possession of countries of which the inhabitants were plainly incapable of defending themselves. The pious purpose of converting them to Christianity sanctified the injustice of the project.

But the hope of finding treasures of gold there, was the sole motive which prompted to undertake it; and to give this motive the greater weight, it was proposed by Columbus that the half of all the gold and silver that should be found there should belong to the crown. This proposal was approved of by the council” (WN IV.vii.a: 661; see also WN.xi.c.36: 192).

And so began the negative side of the consequences to the indigenous people of European colonialism:

“As long as the whole or the far greater part of the gold, which the first adventurers imported into Europe, was got by so very easy a method as the plundering of the defenceless natives, it was not perhaps very difficult to pay even this heavy tax. But when the natives were once fairly stript of all that they had, which, in St. Domingo, and in all the other countries discovered by Columbus, was done compleatly in six or eight years…” (WN IV.vii.a.16: 561)

And:

“But though the judgment of sober reason and experience concerning such projects has always been extremely unfavourable, that of human avidity has commonly been quite otherwise. The same passion which has suggested to so many people the absurd idea of the philosopher's stone, has suggested to others the equally absurd one of immense rich mines of gold and silver. They did not consider that the value of those metals has, in all ages and nations, arisen chiefly from their scarcity, and that their scarcity has arisen from the very small quantities of them which nature has any where deposited in one place, from the hard and intractable substances with which she has almost every where surrounded those small quantities, and consequently from the labour and expence which are every where necessary in order to penetrate to and get at them. They flattered themselves that veins of those metals might in many places be found as large and as abundant as those which are commonly found of lead, or copper, or tin, or iron. The dream of Sir Walter Raleigh concerning the golden city and country of Eldorado, may satisfy us, that even wise men are not always exempt from such strange delusions. More than a hundred years after the death of that great man, the Jesuit Gumila was still convinced of the reality of that wonderful country, and expressed with great warmth, and I dare to say, with great sincerity, how happy he should be to carry the light of the gospel to a people who could so well reward the pious labours of their missionary” (WN IV.vii.a.19: 563).

SummaryAdam Smith was not an advocate of colonialism as practiced by Europeans on defenseless hunter-gatherers, early stone-built civilizations (Central America), or brutally-intimidated ancient civilisations (China), the price for which remains unpaid. He did not consider slavery was a benefit to either slaves or their cruel masters.

He did not consider that anything other than education and knowledge was the trigger for economic development, or that the division of labour was the cause of differences in the living standards of the Ages of Man, which included raising the levels of education and knowledge.

If people are to be critical of what Adam Smith observed about the world around him, and its history, they should at the very least read his Works in full and not just collect a few quotations.

Monday, February 07, 2011

Adam Smith On Markets And Their Regulation

One benefit of enforced “rest” from having a prolonged cold, now reinforced by anti-biotic doses, is the time it creates for some idle thinking, in this case, about Lost Legacy. Looking back over several years, I can follow the development of my narrative against the prevailing practice in modern economics of misrepresenting Adam Smith’s use of the IH metaphor. Over recent time, particularly when responding to the recent challenges from Daniel Klein and David Freidman (for which I thank them for their scholarly approach to discourse among colleagues, and which Jeff Traubman reminds us, is proper in the Republic of Letters).

What occurs to me is my need to focus more on the attempted applications of the IH metaphor in Adam Smith’s name to how markets work, rather than focus on the alleged use by Smith of the IH metaphor as some kind of allusion by him for market processes, to supply and demand, and for the inevitable benefits they contribute to social harmony, even to General Equilibrium, in stark contrast to the highly restricted use Smith had in mind of the purely “domestik” quantitative increase in the “annual revenue and employment”, as some merchants chose to avoid their perceived risks of “foreign” trade.

This also applies to those who associate the IH metaphor working as and within “perfect competition”, and modern “capitalism”, and even as of divine origin.

I think I shall try to take on the applications of the IH metaphor as they are presented by modern commentators, and show that there is no role in economics for a mysterious, non-defined (nor definable) term in their arguments – it never appears in the mathematics of GE, ironically its strongest exponents.

If proponents of the IH metaphor reject the evidence in Adam Smith’s texts (History of Astronomy, 1995, post-h; Moral Sentiments, 1759; Wealth Of Nations, 1776, but he defines metaphors in his Lectures on Rhetoric, 1762-3, 1983, post-h), then let us take the challenge to them to explain what the IH metaphor brings to the party – so to speak – in their modern examples.

“Adam Smith in the traditional market: Deconstructing the Indonesian pasar”

“Today the chicken seller doesn’t budge: 27,000 rupiah (roughly $3) each. He won’t even shave a thousand rupiah for a seasoned bargainer. Demand is high on the eve of the Chinese New Year. Recognizing that he has the upper hand, the chicken seller is winning this centuries-old competition between buyers and sellers. Adam Smith’s “invisible” hand penetrates deep even in this medieval market. Nothing escapes the clutch of the law of supply and demand.” …

“Foreigners might think them to be “native,” “traditional,” a way of life to be preserved, but if you ask everyone there, they would want things to be improved. A rat-infested pasar is not something to be proud of. Adam Smith’s “invisible” hand cannot possibly untangle this mess. A firm, directed hand, and one which is visible to the people, is needed, and it should be the hands of those petty traders and housewives – rough, scaly, dark, from years of peddling, hawking, and handling food.”

CommentTed Sprauge describes a scene that is replicated in many places all over the world. I have attended colourful street markets in Singapore, Kuala Lumpur, Shanghai, Hong Kong, Cape Town, Istanbul, Suez, and Aden, and their modern remnants in Leeds, London, Bergerac, Castillion, Paris, Edinburgh, and Glasgow.

Sprague turns a fine phrase: “Nothing escapes the clutch of the law of supply and demand”. Yes, and Smith made a similar point about the effectual demand for black cloth on a day of mourning at a funeral.

But what he did not do was link this example to the IH metaphor. His explanation of markets was fully explained in Wealth Of Nations without the IH metaphor in the “centuries-old competition between buyers and sellers.”

The subjective social pressures of proper appearance in black as a guest at a funeral fuelled the effectual demand for black cloth, even as an arm- or hat-band, if not a coat. No ‘invisible hand’ was needed to prompt the buying of black cloth; the `IH metaphor’ is redundant in this context.

What does it do? Lead mourners to go out and buy black cloth? The felt social obligation is sufficient, certainly among the principal mourners (family, close friends). Similarly with the effectual demand for chicken, where the “Demand is high on the eve of the Chinese New Year”, as is demand for Haggis, even a nominal spoonful, in Scotland around 25 January (birthday of Robert Burns).

Sprague rightly notes that “Adam Smith’s “invisible” hand cannot possibly untangle this mess”, because “A rat-infested pasar [market] is not something to be proud of”. First I would answer why is it that street markets in Britain are not “rat infested (as was very visible when I visited one selling fish and chickens in Singapore)? Then I would ask, why do most developed markets in Europe and North America (and Singapore!) conform to the ‘big box’ type for retail sales?

Yes, it was and is connected to the rise in per capita incomes from “medieval” conditions. In fact, ‘big box’ selling it seen by some as a threat to city centre small shops, from the perceived lower market prices of the Tesco, Safeways, Wall Mart, Sainsbury, and Waitrose operations.

Ted, from a developed economy’s perspective, abandons his faith in the “invisible hand”, which never existed in the role he assigned to it, and plumps for “A firm, directed hand, and one which is visible to the people” which “needed”. I only comment: beware of what you wish for.

History shows that the gradual regulation of the “medieval” street markets across Europe (at first resisted by the merchants) proved a dubious long-term benefit for consumers. Remember, regulations, licences and such like, are administered by inspectors, who as a rule expand any set of regulations over time by a large amount, and certainly did so in Britain.

These regulations formed the basis for Queen Elizabeth’s mercantile laws, the side-effects of which legalized town monopolies of tradesmen (Guilds, Apprentices, and such like) by devolving their administration and enforcement to the tradesmen, supposedly to be regulated. Smith had plenty to say about these unintended malign consequences in Wealth Of Nations.

The first cry for ‘laissez-faire’ came from a French town-merchant speaking on behalf of merchants – not consumers – against the even more regulated town markets of France.

Rising per capita incomes among the lowest paid and poorest majority from economic development inexorably resolves the awesome problem of ‘rat infestation’ of street markets. Western tourism, ironically, tends to keep them as places to visit (in between spending sprees in place like Singapore’s Orange Road's big-brand retail emporia – I tried my first Apple in a computer shop there in the 1980s).

Ted Sprauge, perhaps, should look closer at Adam Smith’s use of the IH metaphor before considering it as relevant to an Indonesian pasar, interesting as his report was.

Saturday, February 05, 2011

Adam Smith on Providence

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Gavin Kennedy

Recent exchanges on the meaning that Adam Smith attributed to the invisible hand have prompted thoughts about how inequality persist over time. To this end, I have been looking at certain texts by Adam Smith.

“They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for” (TMS IV.1.10: 186-7).

This passage is more literary than historical. By referring to ‘Providence’ in this manner, Smith executed a nice evasion and did not have to explain the means by which this operation was carried out, and most of his contemporary readers, familiar if only vaguely with language that resorted to providential interventions, would accept Smith’s alusion without questioning it.

In his Lectures On Jurisprudence (6 January, 1762), Smith gives an altogether less Providential gloss to the passivity by which property-less peasants accepted the dictates of a benign Providence:

“The tyranny of the feudal government and the inclination men have to extort all they can from their inferiours, has brought property in some measure into these subjects. By the civil law and the constitutions of most countries in ancient times, game was considered as being free to every one. And this certainly is what is most agreable to reason. For no one can have any power over an animall of this sort, nor can he claim the property of it, because it pastures on his ground just now, for perhaps the next moment it may be on another mans ground. But when the feudal government was established, which was the foundation and still prevails in some measure in all the governments in Europe, the king and his nobles appropriated to themselves every thing they could, without great hazard of giving umbrage to an enslaved people' (LJ(A) i.55: 23).

The feudal lords, following the Fall of Rome after the 5th century, took ownership of the land and all that was on it, by violence and the threat of violence, “without great hazard of giving umbrage” from those in no position to resist. Earlier, Roman attempts to divide the land equally among its citizens also suffered from natural pressures of human societies over the ever-present tensions between the generations, to which, incidentally, he exposed his Glasgow students in his Jurisprudence classes and his readers in Wealth Of Nations. His conclusions about legislating for “equality” are worthy of consideration by those peddling modern idealistic utopias:

“Rome, like most of the other ancient republicks, was originally founded upon an Agrarian law, which divided the publick territory in a certain proportion among the different citizens who composed the state.2The course of human affairs, by marriage, by succession, and by alienation, necessarily deranged this original division, and frequently threw the lands, which had been allotted for the maintenance of many different families into the possession of a single person. To remedy this disorder, for such it was supposed to be, a law was made, restricting the quantity of land which any citizen could possess to five hundred jugera, about three hundred and fifty English acres. This law, however, though we read of its having been executed upon one or two occasions, was either neglected or evaded, and the inequality of fortunes went on continually increasing. The greater part of the citizens had no land, and without it the manners and customs of those times rendered it difficult for a freeman to maintain his independency” (WN VII.3: 556-7).

Smith was more candid about the literary niceties when he taught his Jurisprudence students in 1762 and when he published Wealth of Nations in 1776, than about the role of Providence that he expressed in Moral Sentiments (1759), when he taught his Jurisprudence students in 1762 and when he published Wealth of Nations in 1776. In this approach he was closer to Richard Cantillon’s ([1735] 1755) assessments of the realities of the origins of feudal inequalities than appears from Moral Sentiments, where he made a different point, namely that the illusion of absolute power of the feudal lord over his inferiors, nevertheless, meant that the ‘inferiors’ “too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them.”

Cantillon noted that:

“even if the Prince distribute the land equally among all inhabitants it will ultimately be divided among a small number. One man will have several Children and cannot leave to each of them a portion of Land equal to his own; another will die without Children, and will leave his portion to some one who one who has land already rather than to one who has none; a third will be lazy, prodigal, or sickly, and be obliged to sell his portion to another who is frugal and industrious, who will continually add to his Estate by new purchases and will employ upon the Labour of those who having no Land of their own are compelled to offer their labour in order to live” (Cantillon, Essai Sur La Nature Du Commerce en Generale, p5, ed. and trans. Henry Higgs, Augustus M. Kelly, New York, 1964).

As if to make the general comment on the true source of the Landlords’ status as owners of the land, Cantillon makes a more pointed remark that is relevant to Smith’s, albeit later, fable about ‘Providence’”

“It does not appear that Providence has given the Right of the Possession of Land to one Man preferably to another: the most ancient Titles are founded on violence and Conquest. … But howsoever people come into the property and possession of Land we have already observed that it always falls into the hands of a few in proportion to the total inhabitants.

“If the Proprietor of a great Estate keeps it in his own hands he will employ Slaves or free men to work upon it. If he have many Slaves he must have Overseers to keep them at work: he must likewise have Slave craftsmen to supply the needs and conveniences of life for himself and his workers, and must have trades taught to others in order to carry on the work.

In this economy he must allow his labouring Slaves their subsistence and the wherewithal to bring up their Children” (Cantillon, p 32-3).

I suggest these extracts from Smith’s Lectures On Jurisprudence and Wealth Of Nations, and the quotes from Cantillon (Smith quoted from his Essai, WN I.viii.15: p 85), demonstrate that the Providence fable in Moral Sentiments was, well, just a literary allusion; Smith knew perfectly well, and taught, that the earth was divided by men, using violence, and anyway, that ‘equality’ obtained in Moral Sentiments, barely in the matter of biological subsistence, but not in the ‘conveniences and the amusements’ of life, show that so-called Divine Providence had not moved common labourers much further on than when their ancestors ran in the forests.

Thursday, February 03, 2011

A Critic Defending Adam Smith Gets It Wrong

Peter Foster writes in Financial Post, Canada (HERE) and makes a trenchant criticism of The IMF’s Dominique Strauss-Kahn's views on Adam Smith and inequality. (Follow the link to read further details -it's a bit ideologicaL, both ways).

However, one section refers to Adam Smith’s comparison in Wealth Of Nations between the living standards of the poor in the commercial societies and the subjects of an Indian Prince in Africa, who lorded it over 10,000 of his naked ‘savages’.

Peter Foster appears to fault Dominique Strauss-Kahn, who favours equality, with this observation, based partly on a misrepresentation (by Foster or Strauss-Kahn – it’s not clear to me which) of the example of the African Prince, cited above:

“Smith himself noted that even the poor people of his own day, thanks to the unacknowledged wonders of the Invisible Hand, lived better than had kings of previous times. That’s because they had access — via work — to coats, shoes, kitchen utensils and the odd sack of oatmeal.”

Now, Adam Smith never said any such thing, as a check in Wealth Of Nations shows: WN I.i.11: p 23-4. This is in the very first chapter of WN on the division of labour and the ‘assistance and cooperation’ consequent on the employment of ‘many thousands’ in commercial societies.

Nowhere does it say anything of ‘the unacknowledged wonders of the Invisible Hand’.

I am all for the defence and promotion of markets (‘Markets where possible, the State where necessary’), but I draw the line about ignoring Smith’s central reason for the acquisition of the 'necessaries and conveniences of life’, which Smith called real wealth, specifically the spread of the division of labour (which appeared about 11 millennia ago, even in a complex form in the relatively primitive societies of shepherding and farming that formed after the Ice and prior to the evolution of commercial societies) (See Smith’s Lectures on Jurisprudence [1762-63] 1978).

This had nothing to do with a so-called invisible hand of the market (the idea is patently absurd) and only discredits a legitimate challenge to Adam Smith on the existing inequalities that have featured in all societies since the earliest bands of hunter-scavenger-gatherers.

Better to be Mostly Right Than Mostly Wrong (2)

[In the Comments to ‘Being Mostly Right is Better Than Being Mostly Wrong’ (yesterday), Jacob Levy questions my assertions about Smith’s meaning in using the Invisible Hand metaphor and I respond as below.

First, Jacob’s comment.]

Jacob Levy:

“While you seem to have dug much more deeply into this than I have, I have doubts about your late dating of the spread of "invisible hand" as a shorthand for Smith's economic thought, or of its use out of proportion to the importance the metaphor actually had for Smith. I have open in front of me F.W Maitland's A Historical Sktech of Liberty and Equality, 1875, pp. 130-31, which treats it as already the general received wisdom that "invisible hand" and "natural harmony of economic interests" are the same idea, and takes the trouble to show that Smith's belief in them was more limited than was (already, in 1875) widely believed.”

And my (long) response:

“Your thoughts on the importance to Adam Smith of his use of the metaphor of an invisible hand are challenging; they are not, in my view decisive. That F. W. Maitland (1850-1906), as a professor of the laws of England at the University of Cambridge, wrote about Adam Smith’s use of the invisible hand metaphor (IH metaphor), he reflects what is known of the existence Cambridge oral tradition (delivered in lectures and tutorials, rather than in print, which while interesting as a reflection of that oral tradition, they do not demonstrate that the oral tradition expressed Adam Smith’s meaning (Maitland’s ‘Historical Sketch’ is available from Liberty Fund). The influence of Maitland, and a handful of others from the 1870s, was not comparable with the far more decisive explosion in daily references to the IH metaphor in its modern forms from the 1950s. This new 20th-century phenomenon started in the economics discipline after Paul Samuelson’s highly successful and ground-breaking Econ 101 textbook, Economics: an introductory analysis (1948), and took-off over its 19 editions. A wide spectrum of graduate economists, plus those many ‘one-semester only’ readers, took the IH metaphor to their campuses and professional work on a scale wondrous to behold – to sample this phenomenon, read for a week-or-two the free, daily ‘Google Alerts’ for ‘Invisible Hand’ in the world’s media each morning on your PC.

As Samuelson put it, his and earlier, generations, took:

‘This unguarded conclusion [“the mystical principle of the “invisible hand”] has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics (Economics, 1948, p 36)’.

Today, the IH metaphor is ubiquitous, and like a virus (simile) has spread well beyond the millions of attendees at a ‘college course in economics’. It has recently become more controversial, too. Stigler announced recently that ‘it does not exist’, and while encouraging, he was not for the ‘right’ reasons. Also the current the ‘anti-market’ tone of the questioning is disappointing, but so is the failure to realise that Adam Smith made no explicit references to the IH metaphor being a metaphor for markets (nor for perfect competition, the welfare theorems, or general equilibrium). For Smith it was a metaphor and is to be read as such, and the object of the metaphor in his use of it clearly stated when and where he used it.

Smith’s use of the IH metaphor, in contrast, was hardly mentioned until long after he died in 1790. Dugald Stewart, his close family-friend, used Wealth of Nations as the supporting text in his Lectures on Political Economy, delivered at the University of Edinburgh, from 1801. When his lectures were published in the 1850s, they included, in extensive footnote form, extracts from Wealth Of Nations. The IH metaphor passage is among these extracts, but is not commentated on in the lectures as significant. Nor do Smith’s critics in the 1800s mention it; Ricardo’s ‘Principles’ does not discuss it, and I have found no reference to it in Mill or Marx (factual corrections always welcome).

The few references, post-Maitland (1875) certainly show that the IH metaphor was around and understood as you suggest. But so was the alleged doctrine of ‘Adam Smith’s laissez-faire’, the roots of which were closer to Manchester School ideology (pressed on behalf of the mill and mine owners in the legislature) than Smith’s critique of mercantile political economy, which did not mention laissez-faire, nor the other assertions which your article correctly identifies (hence, my point about it being ‘Better to be Mainly Right’, which you are in respect of the bulk of your article).

A. C. Pigou mentions the IH hand metaphor in his welfare economics lectures and text and points to the deficiencies of competition in respect of disagreeable externalities, which, he argued, require, correction by government taxes or subsidies. Others, for example, Alexander Grey in Edinburgh, who included the IH metaphor in his excellent History of Economics (1931, Longmans) when discussing Adam Smith; he placed a theological gloss on it. Oscar Lange, a Marxist, appropriated the Chicago oral tradition (alluded to by Samuelson, above) in 1938 and 1946, to incorporate the IH metaphor in his socialist economics as a task best left to socialist planners because of ‘market failures’ (a more authoritarian response than Pigou’s).

Now, what none of these authors, nor those who quote them with relief – as if secondary sources are definitive and are articulate what Adam Smith meant when he used it (I draw this conclusion with many debates in Lost Legacy with articulate and civilized exponents such as Daniel Klein and David Freidman). They reject my references to Smith on the use of metaphors (he was a long-standing lecturer on Rhetoric in Edinburgh, 1748-51, and in Glasgow 1752-64; we have student notes of his Lectures on Rhetoric and Belles Lettres’ [1762-3]). Klein and Freidman reject the critical key to Smith’s meaning – what was the object of the IH metaphor as he used it, not how they attribute it to him?

All references to wider meanings about ‘markets, prices, and systemic harmony’ are imputed, often by modern concepts of which Smith and his readers were unfamiliar, and by allusions to which he was, if anything, and certainly in the modern contexts claimed, hostile – such as ‘selfishness’ being overcome by it.

Markets operate, not by a ‘magical’, nor theological, invisible hand, but by a very visible price system, clearly delineated by Adam Smith in Books I and II of Wealth Of Nations – the dynamic supplied by the very visible (in Smith’s terminology) relationship of ‘natural’ prices and ‘market’ prices – the former based on costs, of which the producer is well aware and respectful – it’s his money; the latter based on variable effectual demand in the market each day, on which his profit – and survival – may depend. If he covers his costs (inclusive of his profit) he continues; if he doesn’t he adjusts his behaviour as quickly as he can. He is not ‘led’ by ‘an invisible hand’ to do this. The driver is very visible, not invisible, because in market prices have to be visible for buyers and sellers to enter into and conclude exchange transactions. They must address each others’ self-interests, not just their own.

The ‘invisible hand’ metaphor refers to what cannot be seen, such as the private motivations of the parties. To assume and assert that it is merely about global ‘self-interest’ that drives them is empty of explanation (no mathematical terms exists for the IH in all the equations). Smith makes this point well in Wealth of Nations.

The merchant’s self-interest may be to make a profit (he can’t make one if he suffers losses), but to make a profit he has to take risks when undertaking the costs of producing his items for sale. Risks are not equal or certain in all activities; some activities may be perceived more risky than others. The security of his capital outlays is important (in the 18th century, utter destitution awaited losers). If an activity is associated with higher risks than another that is available, some, but not all, merchants tend to avoid the more risky venture if they can.

In Smith’s sole example in Wealth Of Nations, some merchants are influenced to avoid foreign and colonial trades and prefer to trade locally. Smith details the reasons of their insecurity for this in the paragraphs preceding his use of IH metaphor and specifically states why they prefer to invest in ‘domestick’ trade. By thus avoiding their perceived risks of foreign trade, they are led to add to the only alternative of ‘domestick’ investment, which adds to the annual output of ‘necessaries and conveniences’. Only arithmetic is required to understand this – he was writing for legislators and those of who influenced them, not maths graduates, like himself, and we call that rule: the ‘whole is the sum of its parts’. Wealth consisted of the ‘annual revenue and employment’ from the ‘conveniences, necessaries, and conveniences of life’.

I venture to suggest that his mostly educated readers would likely have studied classical languages, English and rhetoric too, and they would be familiar with the role of a metaphor: to connect to its object, and to express it in a “more striking and interesting manner” (Smith: Lectures on Rhetoric and Belles Lettres, [1762-3) Liberty Fund, p 29). Yes – that’s all!I would further suggest that the invisible hand was a very common figure of speech as a metaphor in the 17th-18th century, mainly in theology, sermons, and literature. Many before and after Smith used the same metaphor in scores of context. He did not invent it. He simply stated its object, as his students and educated readers would expect. The main reason why his contemporaries made nothing of Smith’s use of the IH metaphor, is simply because they could see what he was doing, and saw him use many other metaphors, some memorable (‘Daedalian wings of paper money’) and some execrable (‘waggon-way through the air’ (WN II.ii.p 321).

Practical business people today know they can see how markets work by the very visible instrument of prices. They do not need ‘an invisible hand’ to do that.

To paraphrase a Hollywood scriptwriter: “Show me the price! And only then I may decide whether to give you the money”.